Effects of Political Risk Factors on Tax Revenue in Kenya

Abstract

A broad range of tax reforms have been implemented in Kenya in the post-independence period with the objective of increasing tax revenue for promoting economic growth with reduced reliance on external funding. Most of the reforms have targeted broadening of the tax base. However, tax collections remain inadequate, and deficits have persisted. Past studies on tax revenue growth have looked at effects of foreign sector, stage of development, demographic factors and sectoral mix on tax revenue. The models used in those studies did not factor in political risk factors including democratic accountability, bureaucracy quality and internal conflict. Such factors can have significant direct or indirect influence on tax revenue. This study estimated tax revenue models with these factors captured using data for the period 1984 to 2016. The findings show that increase in bureaucracy quality and democratic accountability lead to increase in tax revenue. Efficiency of institutions is shown to enhance tax collections during periods of social strife suggesting the presence of displacement and inspection effect. Internal conflicts are shown to cause declines in tax revenues. The government of Kenya and its revenue authority should therefore strengthen the quality and efficiency of institutions and effective control measures on acts of civil war, terrorism and civil disorder alongside the tax reforms to increase tax revenues